Don't Just Give It Away: How to Make the Most of Your Charitable Giving, Chapter 5
-- Erica Jong
Just as with any other form of financial investment, philanthropic investment requires an assessment of one's level of comfort with "risk."Where is the "risk" in philanthropy? It lies in how effectively your contribution will be used by a given organization to accomplish the specific charitable objects you have set. More specifically, "risk" is determined by how capable an organization is of using your donation to make the greatest possible impact on the area of service that is your focus.
Your charitable contribution to one nonprofit can have more or less risk associated with it based on several factors:
- The organization's stage of development
- The size of the organization
- The organization's budget
In return for assuming the risk, however, you may gain the ability to have a greater impact with a smaller overall contribution. For example, newer, "venture" nonprofits tend to expend a higher percentage of their funds on service. The downside is the uncertainty of whether the organization will survive, much less thrive, over the long term. Should it fail, your contribution will have suffered the risk of having had only a momentary effect.
For example, donating $5,000 to a new charity run by volunteers with an annual operating budget of $10,000 can have a substantial impact on their ability to provide services—if those services are well-planned and well-executed. But if the organization goes out of business eighteen months later, will you feel that you made a poor investment?
On the other hand, the "safer" the investment—with an established organization with a track record of service—the more reason you have to believe that your contribution will be used effectively. Further, you can feel fairly secure that your investment will serve as a "building block" atop the charity's already established foundation of success.
Although your investment risk is lower, the immediate impact of your donation may be diminished by the larger scale of operations. That is to say, your $5,000 will have less impact on an operation whose overall program and service budget is $5 million or $25 million than it will on a small, "venture" charity.
Put another way, the "safer" the investment, the more certain you can be that there will be a positive and longer-term return on that investment. However, that return may be incrementally smaller. For example, an organization such as the Red Cross is well-established, and has a well-publicized, successful track record. A donation to the Red Cross may not have as profound an impact in the larger scheme of its overall activities, but you can feel secure (at lower risk) that your contribution will be soundly utilized.
The "Lifecycles" of a NonprofitVirtually every non-profit or charitable organization will move through three distinct phases over the course of its lifetime. At each stage of its development, the organization will have unique needs, unique challenges, and unique opportunities. Also at each stage, the nonprofit will pose unique challenges and offer a unique potential for return. By determining an organization's position in its cycle of development, the philanthropic investor can more accurately assess the potential risks and rewards of contributing to that charity. In this chapter, the "lifecycles" of a charitable organization will be examined.
The "Emerging" StageThe first stage of development is the "emerging" or grass-roots stage. This is that critical one- to two-year phase immediately following the launch of a new charity. This phase is marked by several distinctive characteristics.
Generally, the newly formed organization is headed by its founder, someone with a very strong vision and energy and who will try to make that vision a reality.
The leadership of the organization at this stage generally consists of a relatively small group of like-minded people who subscribe to the founder's mission and vision for the charity.
Unless there has been an unusual infusion of cash by the founder, most nonprofits at this early stage face daunting financial challenges. In an effort to overcome those challenges, it is critical that the emerging organization establish a solid foundation of supporters who share a commitment to its mission and are willing to back that commitment with a financial investment.
Many organizations in this initial stage are struggling so hard for survival and to "get the message out" that they do not spend the requisite amount of time developing a detailed and actionable strategic plan that will lead the organization through its next several years.
At this stage, the organization presumably has defined or is developing some new and better way of providing a service or program to a population whose need has not been adequately met. This is where tremendous opportunity exists for the charitable investor who is seeking to have an impact through support of an innovative initiative.
To get involved with an emerging grass-roots organization can be tremendously gratifying for a donor "getting in on the ground floor" in support of a program or service that might have a profound influence on the community.
The risk in supporting an organization at this stage of development is the group itself will not evolve past this stage. It might not develop a strong governing board; a sound leadership and staff; a solid corps of volunteers, clients; or, most importantly, constituents, or most importantly, the broad base of financial resources necessary to sustain the emerging agency in those first two years.
Philanthropists seeking to support an emerging organization with an innovative program can minimize the risk to their investment and help ensure its long-term return by doing the following:
- Examine the organization's written strategic plan to determine whether it is realistic and reliable, and whether it will lead to achieving the charity's stated vision.
- Carefully study the written program or service outlines to ensure that they make sense and to determine whether a strong ongoing and follow-up evaluation component is built into program activities.
- Review the credentials of the individuals and professionals who established the nonprofit and who designed the program or service that you will support. Do they have the experience and expertise to undertake a new enterprise?
- In addition to funding the actual program, service, or operating overhead of the organization, insist that a portion of the funds you provide be utilized for leadership training, technical assistance, and fund development training for the key people associated with the charity.
- Lastly, don't walk away from your investment—stay in touch with the organization and its leaders to ensure that they are following the strategic plan and are implementing sound fund development and financial plans for the long-term health of the organization.
The Stage of "Maturity"The second stage of development in the life of a nonprofit can be called the "maturing" stage. This stage is characterized by the following:
- The organization has survived infancy ("the terrible twos") and is getting stronger every day.
- The organization has recognized the need for an expanded, more diverse, more professional, and more knowledgeable board of directors. These individuals understand that they are charged with overseeing the health of the organization at present, as well as charting its course for the future, and for securing the resources necessary to navigating that course.
- There is now a paid management team, which includes specialists in the administrative functions, as well as experts in program and service areas, who are responsible for the day-to-day operations of the nonprofit.
- The mission and image of the charity are fairly well-established. The emphasis is on ensuring that the organization's message is consistent and highly visible, as opposed to re-crafting it.
- Financially, the mature organization is operating on an even keel, always looking for new supporters and sources of funding, while recognizing the importance of maintaining the allegiance of existing donors.
In fact, it may seem like a "boring" investment. However, in this stage of its development, an organization can find it extremely difficult to secure ongoing support for successful initiatives. It seems like a paradox—when things are going well, it's almost more difficult to find donors who will invest in an ongoing program.
The reason for this is simple. Many charitable investors are always looking for what's new, what's exciting, what's innovative. The ongoing program starts to look like the "meat loaf" course on a buffet of great variety. Therefore, the philanthropist looking to make a very safe investment—one whose return can be fairly well predicted—can accomplish a great deal risking very little by looking to support an organization that is in this stage of its development.
Where is the risk in a "maintenance"-phase organization? The risk lies in the possibility that the leadership will fall into complacency because things are running so smoothly. With things going well, trustees may become less active in pursuing new supporters. Donations level off as a result. New clients cannot receive services because funding is slipping even as the costs of providing them are rising. Meanwhile, volunteers, donors, and the community at large are looking for the next exciting program coming down the pike.
The biggest risk to the philanthropist donating to a maturing organization arises when the charity fails to assess or acknowledge changes in the environment in which it serves. Such changes might include a shifting demographic (e.g., the ethnic or cultural mix in the community), upturns or downturns in the economy, a change in the funding stream, advances in the organization's field of service (e.g., breakthroughs in medical research), or encouraging results from new or more innovative methodologies.
Another way to explain the notion of "changes in the environment" is by illustration. The eradication of polio was a dramatic alteration to the environment in which the March of Dimes came into existence. The March of Dimes shifted its focus in order to accommodate the changed medical research and support needs of that time.
A more contemporary example is the changing environment in which AIDS-focused charities function. Not many years ago, the mission if direct service organizations was to provide support for a dying constituency and their loved ones. With the advances in AIDS treatment, service organizations are now shifting their focus to providing assistance with the care and management of individuals who can and will live for many years despite carrying the AIDS virus. Thus, a significant shift in the medical treatment of AIDS required charities that focus in that area to adjust to both mission and programming in order to stay responsive to the changed needs of their service population. With the advances in AIDS treatment, however, came a change in the public's perception of the seriousness of the epidemic. In some communities, that change in perception has negatively affected funding for AIDS-focused charities.
Effective organizations in the field of AIDS-related services have had to remain flexible and responsive to these "changes in the environment" in order to remain both financially and functionally available.
Philanthropists contributing to a mature organization can insure their investment by insisting on and supporting ongoing professional development on the part of the organization's leadership—board and staff—as well as encouraging and funding access to information that may have a bearing on the future course of the organization.
The biggest concern for you as a donor supporting an organization at this stage of development should be that the good work accomplished as the result of your contribution will cease when your funding ceases; the organization's leadership has not planned nor made provisions for a future funding stream.
The "Renewal/Revitalization" StageThe third significant stage in the life of a charitable organization is the phase of renewal or revitalization. This is the stage through which the organization transforms itself in response to environmental factors (or market forces) to ensure that it continues to be as responsive as possible to the needs of its service population.
Typical of this stage:
- The organization is undergoing a substantial degree of change: its programs and services are being updated, revamped, or in some cases perhaps being eliminated.
- New programs and services are being developed and implemented to meet the changing needs of the service population.
- The mission of the organization may change somewhat to more accurately reflect the agency's response to the changing needs of the service population.
- The organization is undertaking a revitalized effort to establish its image, its visibility, and its mission before the community in order to attract volunteers from segments of the community that have not yet been tapped, to attract clients for its programs and services, and most important, to attract new and expanded funding sources.
This, too, is an extremely exciting time for the philanthropic investor to get involved with an organization. On the one hand, the organization has been in existence for some period of years, thereby ensuring that the charitable investment is not a totally risky one.
On the other hand, it is an opportunity for the philanthropic investor to get involved in innovative programs and services leading to new solutions, and to participate in the revitalization of the charity's mission.
To ensure your charitable investment at this phase of an organization's development, you should encourage the charity to engage in safe and sound risk, as well as productive change. At the same time, be sure that the charity is not simply engaging in change for the sake of change. In other words, you should keep a close eye on the motives underlying a changing dynamic within an organization or program. If innovation is the result of a clear assessment of alterations in the environment, this will bode well for the organization. If, however, dramatic change is an impulsive act meant to "shock" the organization out of a slump, you would do well to withhold financial support at this time.
-- The Kabbalah
Starting All Over AgainAn organization that has successfully navigated the stage of renewal or revitalization in response to a changing environment will enter once again into a stage of maturity. During this phase, the changes and innovations in that were initiated during the renewal stage in the areas of service, governance, and administration will need to be integrated, stabilized, evaluated, and consolidated—always with one eye on the continually changing environment.
In fact, a successful and healthy organization will alternate between periods of renewal/revitalization and maturity/stabilization.
To visualize the lifecycles of a nonprofit organization, imagine a "Slinky" toy gently stretched out. Organizations move through a continuous cyclical pattern of innovation and consolidation (renewal and stabilization)—never coming back to the same place twice, but always moving forward.
When the "Slinky" Comes UncoiledThere are two additional mini-stages in the lifecycle of a charitable organization. The healthiest of organizations will skim or skip through these phases without taking a lengthy or costly detour. These mini-phases are also known as "transition" points.
Transitions occur at the point where a mature organization—recognizing it needs to adapt—begins the process of renewal. Conversely, another transition occurs as the organization begins to stabilize or consolidate the innovations it has adopted during the renewal stage.
By not responding quickly enough to changes in the environment—particularly the funding environment—organizations can slip into a kind of "free fall": funding plummets, the participation and enthusiasm of volunteers wanes, the leadership grows tired and frustrated, and management is operating in coast mode.
A charity slipping into "free fall" is not unlike a ship springing a leak—unless the leak is found and plugged quickly and effectively, the damage to the ship will increase. The longer an organization takes to recognize that it has bypassed a critical transition point without making appropriate adjustments, the longer it will take and the more resources it will consume to pull the organization back into a healthy lifecycle pattern.
Therefore, it is vitally important for the philanthropist to beware of investing heavily in an organization that has not recognized or responded to the fact that the world in which it operates has changed. Charitable investors are strongly urged to carefully examine an organization's written strategic plan before contributing heavily. Is the organization cognizant and prepared for what is up ahead, and have the managers developed a plan for successfully traveling through the anticipated changes?
Confronting CrisisThe other mini-stage, the phase one hopes no organization ever experiences, is that of "crisis." Crisis can occur at any time during an organization's lifecycle, and can take several forms:
- Crisis of leadership (for example, the untimely or unexpected death, resignation, or termination of one of the charity's key leaders)
- Operational crisis (for example, gross mismanagement of the organization's resources or a lawsuit against the nonprofit, draining it financially)
- Crisis in the environment (for example, a change in the economy that substantially impacts the organization's funding stream, such as a drop in the stock market in communities where substantial donor support comprised transfers of appreciated investments)
Size as a Risk FactorIn assessing your comfort level with a charity's organizational culture, as well as in determining the level of philanthropic "risk" you are willing to accept, an important factor to consider is the size of an organization.
The smaller organization allows for the possibility of a relatively modest philanthropic investment to have a significant impact. Small charities can also provide the greatest opportunity for a high level of personal recognition and community appreciation. And finally, in the smaller organization, the leadership generally encourages—or at least does not discourage—active involvement by major donors in an advisory capacity.
In a mid-sized organization, the philanthropic donor can enjoy a higher degree of anonymity if he or she so chooses, and still achieve a relatively significant impact on the community through the support of this established organization. An organization of moderate size, however, will generally prefer not to involve the donor in key organizational or programmatic decisions unless the donor also serves on the board of directors.
Large organizations, by virtue of their size, show evidence of having a successful organizational track record. For that reason, making a contribution to a large organization is very comfortable for many donors—they have a sense that their charitable investment is at very low risk. After all, in order to have become a large organization, the charity needed to convince many donors and other supporters that the operation is sound, its efforts are worthwhile, and that the agency is here to stay for the long term. This makes for a comfortable place where charitable investors can donate their funds.
Another low-risk charitable investment opportunity can be found in organizations having a dual national/local chapter structure. In some ways this may represent the soundest opportunity for a charitable investor.
On one hand, because contributions can be directed for use in the local community, donors are able to keep an eye on their investment and observe the tangible results of their gift. At the same time, the donors have a sense of assurance that the local chapter is operating to certain standards of sound management, leadership, and decision making because of the oversight provided by the national umbrella organization.
Do not accept this assumption at face value. This is not always the case. Donors would be well-advised to investigate the exact relationship between a local chapter and national umbrella organization when considering making a gift to such a charity.
When giving at the national level, the donor may feel less connected to the organization to which they are contributing. But if chosen carefully, a national organization may bear the greatest fruit when it comes to effecting policy or system change. If that is the "sphere of influence" you have selected for your philanthropic investments, nationally or regionally based organizations will have the greatest impact.
Finally, there is the option of providing funding to an international organization. There are two basic options for international giving. One can contribute to an organization that operates solely in a country other than the one in which you reside. Alternatively, you can invest in a domestically based organization that operates across borders and in many countries (for example, the International Red Cross).
Because the laws and traditions governing the charitable sector in other countries may vary widely from the standards that have been set in your home country, it is important to thoroughly understand how your contribution will be utilized and monitored by an international organization. This is why many contributions made to specific foreign nations are made primarily through faith-based institutions (e.g., churches or religious groups). Donors generally feel more secure when channeling their support through an organization with which they are already comfortable or familiar.
Organizational Budget as a Risk Indicator
Another means for assessing the level of philanthropic risk represented by your choice of charity is to look at the organization's budget. Because of financial scandals that were uncovered in several major national organizations in the United States a few years back, donors began to realize that there may be some distinct advantages to making their charitable investments in organizations of very modest means.
For example, if an organization is capable of performing a tremendous service in the community, affecting a large number of people, using innovative means and methods, and is doing so with an annual operating budget under a $100,000, it is highly unlikely that there is a lot of "slack" in the budget or a mismanagement of funds. A charitable investment of virtually any size in an organization with that profile can have quite a dramatic impact on the community, as well as on the organization's ability to build support from other funders.
That is not to say that organizations that are operating with significantly higher budgets—whether it is $2 million, $5 million, $20 million, or $100 million—are less effective or more wasteful. It may be true, however, that organizations relatively "well off" compared with the rest of the nonprofit sector may be a little less cost-conscious in their approach to solving society's problems.
In fact, one of the key problems we see in the largest organizations in the charitable sector is the same problem that we see in many of our largest business corporations. Innovation and respect for human resources as an organization's most valuable assets are replaced by a misguided belief that the simple application of funds to a problem will solve that problem.
-- Stephen Chapman
How Important—Really—Is Money?Ask most nonprofits operating today to name their single largest problem, and they will tell you that it is a lack of money. In the charitable sector, however, lack of money is rarely the real problem. The money problem is only a symptom.
Organizations with outstanding leadership, sound management, a strong mission, effective programs and services reflective of that mission, and a welcoming attitude toward new constituents (donors, volunteers, and clients alike) do not suffer money problems. It is when one of those key elements is out of sync that an organization begins to feel the pain financially.
That is why a large and wealthy organization can often operate at less than optimum performance levels before realizing that there are internal organizational problems. Financial "comfort" can act as a mask—even to the leaders of an organization—obscuring very real problems of governance, administration, or service until well past a point where the problem would be simple to address.
For that reason, the larger the gift and/or the wealthier the organization, the more critical it becomes for a philanthropic investor to have specific knowledge about the way in which that investment will be applied. As a donor, you want to ensure that your contribution will not serve as a temporary patch on a tire that's fundamentally shot, only to let the organization wobble down the road a little further.
Just as in financial investing, a philanthropic investor should come to terms with the level of investment risk with which he or she will feel comfortable—before committing to a major contribution. The "risk" factor in the charitable environment can be assessed by examining the organization's overall operational size, its budget, and its current stage of development.
In terms of organizational lifecycles, the charity that is in the emerging stage or in the renewal/revitalization stage represents the highest level of risk for the philanthropic investor. In many instances, however, those charities provide opportunity for the greatest social return on investment.
An organization in maturing stage offers a sound, lower risk investment for the philanthropist.
The charitable investor should take great care when considering a contribution to an organization that is either in transition or in crisis.
The preceding is a guest post by Renata J. Rafferty.